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By Woods & Durham, Oct 25 2017 06:00AM

IRS’s Small Business/Self-Employed Division (SB/SE) has issued an internal memorandum that explains a pilot program for auditing expenses taken on Form 1040, Schedule F, Profit or Loss From Farming.

IRS’s pilot program. In its internal memorandum, SB/SE has issued guidance with respect to a pilot program for auditing Schedule F expenses, that is only being worked currently in IRS’s Brookhaven, NY campus. IRS notes that there has been limited coverage of Schedule F in recent years in by IRS’s Correspondence Exam group. IRS notes that there may be compliance issues such as deducting expenses on the wrong form, deducting expenses actually belonging to another taxpayer, or deducting hobby losses.

Among the instructions that the memo provides to IRS auditors are:

… Deposits and supplies. Farmers often write a substantial number of checks during the last few days of the tax year to pay expenses. Large disbursements should always be part of an auditor’s examination. He must then determine if the disbursement is a payment or a deposit. Whether an expenditure is a payment or a deposit depends on the facts and circumstances of each case.

A deposit to be applied against a future expense is not deductible, unless the expense is for future supplies. The following factors, although not all inclusive, are indicative of a deposit as opposed to a payment: a) the absence of specific quantity terms; b) the right to a refund of any unapplied payment credit of the contract; c) the treatment of the expenditure as a deposit by the seller; and d) the right to substitute other goods or products as specified in the contract. These factors apply to all farm expenses for which a payment is made prior to delivery.

Code Sec. 464 limits the allowable deduction for prepaid supplies if they exceed 50% of the total deductible farm expenses for the tax year. If the prepaid farm supplies have actually been used or consumed, the amount is fully deductible.

The expense must be a payment for the purchase of supplies, not a deposit. In order to meet this requirement:

• The payment must be made under a binding commitment to accept delivery of a specific quantity at a fixed price, and the farmer must not be entitled to a refund or repurchase.

• The prepayment must not merely be for tax avoidance, but must have a specific business purpose. Examples of business benefits are: fixing maximum prices; securing an assured feed supply; and securing preferential treatment in anticipation of shortages.

• The deduction must not result in a material distortion of income. Some factors to consider in determining wether there is a material distortion of income are: the farmer’s customary business practices in conducting the farming operation; the materiality of the expenditure in relation to the taxpayer’s income for the year; the time of the year the purchase is made; and the amount of the expenditure in relation to past purchases.

… Schedule F, Line 13, Custom Hire. Farmers may hire individuals or businesses who own equipment that the farmer does not own, such as no-till planters, combines, etc., to perform specific activities on their farms. These amounts are fully deductible as an expense on Line 13 of Schedule F, Custom Hire. Auditors should be attentive that amounts paid for rental or lease of equipment operated by the taxpayer should not be on this line; these should be listed on Line 24A, Rent or lease.

And, wages paid to employees should not be shown on this line. If an auditor does run into employee wages on this line, the memo instructs him to send an email with the employee’s social security number to a specified IRS employee.

… Fuel expenses. In order to determine that all fuel expenses are for conducting business on the farm, the auditor should ask the following questions: a) Do you have a storage tank on the farm? b) And how do you account for personal use from the storage tanks? And, if fuel was purchased from a gas station, the auditor should request an explanation of why that was done to ensure the gas was not for personal use.

By Woods & Durham, Oct 3 2017 04:00PM

Any food inventory donated by a trade or business, including C corporations, is allowed an enhanced deduction, which is the lower of the cost basis plus one-half of the ordinary income recognized if the inventory would have been sold at its fair market value; or twice the cost basis of the inventory, assuming the following conditions are met:

• The donee must be a 501(c)(3) organization and the property must be in its exempt purpose solely for the care of the ill, needy or infants;

• The property is not exchanged by the donee organization for money, property or services;

• The donor receives a written statement from the exempt organization detailing that the property will be used to meet the requirements of this section;

• The food must be “apparently wholesome food,” which means that it is intended for human consumption and meets all quality and labeling standards;

• The deduction cannot exceed 10% of the taxpayer’s aggregate net income from all trades or businesses from which the contributions were made.

If you have food inventory that you would like to donate or you have already donated, contact us and let us help you with this process.

By Woods & Durham, Sep 11 2017 04:00PM

Hiring veterans is not only helpful to the veteran community, but also provides the largest Work Opportunity Tax Credit (WOTC) to an employer. The maximum credit is $9,600 per veteran employed.


1. The employee previously served in the military

2. The employee is considered a Qualified Veteran. To be considered “qualified” the employee must meet one of the following:

• The employee is unemployed for a period of at least 4 weeks before being hired


• The employee is unemployed for a period of at least 6 month before being hired


• The employee is entitled to compensation for a service connected disability and is hired not more than a year after leaving the military


• The employee is entitled to compensation for a service connected disability, has been unemployed for at least 6 months and is hired no more than a year after leaving the military


• A member of the employee’s family has received SNAP benefits/food stamps for at least 3 months during the previous 15 months before being hired

3. The employee is a new hire, not a rehire


Proper documentation must be submitted for approval no later than 28 days after hiring a qualifying employee.

Other classes of employees that may qualify for the WOTC are Veterans, TANF (Temporary Assistance for Needy Families) Recipients, SNAP (Food Stamp) Recipients, Designated Community Residents (employees 18-39 years old living in a designated rural renewal county), Vocational Rehabilitation Referrals, Ex-Felons, and SSI (Supplemental Security Income) Recipients.

More info can be found at, https://www.doleta.gov/business/incentives/opptax/

By Woods & Durham, Aug 18 2017 04:00PM

Currently any taxpayer that purchases a solar energy system is allowed a tax credit of 30% of the cost. Starting in tax year 2020 this credit will be reduced to 26% of the cost. In 2021 it will again decrease to 22%, with the final expiration of this tax credit being December 31, 2021. So, if you are planning on purchasing a solar energy system, get it before time runs out on this tax credit.

This tax credit is for solar energy systems which include solar water heaters and solar panels. The credit is allowed on new or existing homes and is allowed for a taxpayers principal residence or second home. Rentals do not qualify.

If you have any questions regarding the solar energy tax credit please reach out to us.

By Woods & Durham, Jul 27 2017 09:52PM

By now, you've heard the rumors... Last month, Kansas lawmakers increased our income taxes. There are additional tax brackets, the tax rates are higher and business income is now subject to income tax. This would lead most to believe their tax bills will be increasing but, that isn't the whole story.

The Bright Side

Some items eliminated with the 2012 Kansas tax cuts have been resurrected! The credit for child and dependent care is back at 12.5% for 2018 and will grow to 25% in 2020. If you've been carrying forward or have a current year Federal Net Operating Loss, it is now also allowable on your Kansas return. Federal Itemized Deductions that have been reduced in Kansas calculations will now be phased back in and allowed in full by 2020. Most importantly, no taxpayer will be assessed penalties or interest due to underpayment of Kansas tax as a result of these tax law changes, so long as the tax is paid on or before April 17, 2018.

What Should I Do Now?

If you are an employee and have Kansas Income Tax withheld from your paycheck, the withholding tables changed on July 1st. You may notice more withholding deducted from your paychecks throughout the remainder of 2017 to make up for the retroactive tax increase effective January 1, 2017.

If you make quarterly estimated tax payments to Kansas, the tax increase will not be reflected in the quarterly payment coupons provided with your 2016 tax retrun. If the thought of paying a tax bill in April is bothersome, the remaining quarterly tax payments for 2017 could be recalculated to reflect the increased tax rates.

In either of the above situations, if there is a tax balance due to Kansas for 2017 after the dust settles, it will be penalty and interest-free.

Still Not Sure?

Everyone's tax situation is unique and we're here to help and offer professional advice tailored to your situation. Give us a call if you have any lingering questions. We would be more than happy to visit with you!

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